Seeking Alpha: Neogen Flexing Its Operational Excellence

If you want to argue that valuation doesn't matter, you could certainly do worse than to highlight Neogen (NASDAQ:NEOG) as a prime example. Seemingly always expensive, Neogen has nevertheless leveraged its proven model to generate mid-teens annualized revenue growth over the last decade and nearly 20% operating income growth. Then again, maybe valuation does matter - if you had bought in five years ago, you'd be sitting with a double, but that's true for IDEXX (NASDAQ:IDXX) too, and you would have done even better with Illumina (NASDAQ:ILMN), Thermo Fisher (NYSE:TMO), or MWI Veterinary Supply (NASDAQ:MWIV). Even 3M (NYSE:MMM) (and yes, we're really stretching the notion of comparable here) would have given you a 70% return before dividends over the past five years.

So, what to do about this stock? I love Neogen's business, and I think the company has a lot of room to grow with its allergen, toxin, and antibiotic tests, its food safety products, and its genetics/bioinformatics business. I also think the company's time-tested acquisition strategy can be applied again and again to grow the business, particularly outside the U.S.

But trees don't grow to the sky, and how much growth should investors expect? Growing revenue at a double-digit annualized rate for the next decade would be fantastic for most companies, but even a 20% 10-year FCF growth rate only gets you to about a $60 fair value in my model. My concern, then, is that Neogen can remain an operationally superb company but one whose share price performance could lag as those multiples start to come down.

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Neogen Flexing Its Operational Excellence